Economic Update - October 2025

Like President Donald Trump’s escalator stopping at the UN, the US Federal Government’s shutdown is producing some outrage, but is largely a non-event. What is important is that the US economy is holding up despite employment and inflation moving slightly in the wrong direction. An AI bubble was the talk among investors during the month, but despite this, investment in data centres continues to amaze. The Australian economy is also proving more resilient than expected, with household spending taking the baton from the public sector. As ever, the RBA did not want to gamble on monthly inflation data and will instead hold its cards until its next meeting on Melbourne Cup day.   

What happened in Australia?

At the start of the month, June-quarter GDP surprised on the upside with a 0.6% versus an expected 0.5% quarterly increase. GDP increased 1.8% on an annual  basis (see chart below).

Private demand was the major driver as public demand continued to slow from its highs of last year (see chart below). Public investment decreased for the third consecutive quarter, dragging overall investment down (see the second chart below).

Adding to the picture of rude economic health, the monthly spending indicator increased for the third-consecutive month in July to 0.5% (see chart below).

The RBA expected an increase in household spending given that falling inflation would push up real incomes. However, there has also been a positive wealth effect from recent strong increases in house and equity prices, and this has helped push up private demand by more than the RBA forecasted. Household wealth increased 2.7% in the June quarter.

“Data for the June quarter show that private demand is recovering a little more rapidly than expected, taking over from public demand as the driver of growth.” Michele Bullock, RBA governor.

This higher than expected increase in household spending has helped push up the monthly inflation rate in July and August. Headline inflation increased to 2.8% in July and to 3% in August. Because of the higher than expected household spending and inflation, the RBA kept interest rates on hold in its meeting in late September. 

Trimmed-mean inflation fell slightly in August, but as RBA governor Michele Bullock explained in her Monetary Policy Board media conference, the RBA’s preferred inflation measure is the quarterly trimmed-mean not the monthly trimmed-mean. The next quarterly inflation data will be available just before the Monetary Policy Board’s next meeting, which is at the start of November.

During the month, a freedom of information request forced the RBA to reveal that in March this year, it had revised down its estimate of the neutral interest rate for March 2024 from 3.6% to 2.9%. The neutral interest rate can bounce around and has a large margin of error, which is why central banks do not rely on it overmuch. However, the downward revision in the estimate suggests that the RBA’s monetary policy was more restrictive last year than it initially believed. How restrictive the cash rate is at the moment depends on where you think the neutral rate currently is. The last estimate we have is 2.9% from May, so it is still quite restrictive. If the quarterly inflation data looks good for September, the RBA will likely cut rates at its November meeting.    

What happened around the world?

USA

Perhaps the biggest story of the month was the increased focus on investment in data centres and whether we are in an AI bubble (see chart below). The interest was fueled partly by Nvidia’s USD 100 billion data centre and equity deal with OpenAI, Nvidia’s USD 5 billion investment in Intel, and Meta’s USD100 billion AI infrastructure deal with CoreWeave.

Jerome Powell added to concerns when he made comments after a speech that echoed former governor Alan Greenspan’s famous "irrational exuberance” speech.

“. … equity prices are fairly highly valued.” Jerome Powell, speech at Greater Providence Chamber of Commerce 2025 Economic Outlook Luncheon, Warwick, Rhode Island.

Despite the nervous talk behind the scenes, the Philadelphia Semiconductor Index increased by 12.36% during the month. The NASDAQ increased 5.61% and the S&P 500 increased 3.53%.

Turning to economic data, after September started with weak non-farm payrolls results for August (an increase of only 25,000), market sentiment darkened further when the regular annual revision to non-farm payrolls came in at a record 911,000 (see chart below).

The annual revision replaces estimates for new hires from new companies and job losses from dead companies with the actual figures. The 911,000 downward revision was much larger than expected. Further, it shows that the US labour market is performing a lot worse than in recent years. The previously indestructible US labour market suddenly looks vulnerable.

Despite the dent in payrolls, unemployment has hardly changed this year and increased only slightly to 4.3% in August. The reason why is that while labour demand is falling, so is labour supply. As a result, commentators have now turned their attention to the monthly JOLTS (Job Openings Labour Turnover Survey) because it provides a better picture of what is happening with labour demand and supply.

Early in September, the JOLTS result for July showed the lowest level for openings in over a year. At the end of September, the August release showed little change, but for the first time since the pandemic, the number of unemployed people is now greater than the number of job openings (see chart below).

On the inflation front, headline inflation increased from 2.7% in July to 2.9% in August on an annual basis, while the Fed’s preferred measure PCE, increased from 2.5% to 2.7%. Interestingly, given tariffs, durable goods PCE increased from 3.9% in July to 5.2% in August.

Given this employment and inflation data, the Fed’s decision to cut interest rates by 25 bps was not a surprise. However, it is important to note that despite employment and inflation deteriorating slightly (and despite the impact of tariffs), the US economy is holding up surprisingly well.

“Inflation is moving in the wrong direction. Employment is moving in the wrong direction … while it's not ticking in the right place, the downside is relatively limited.” Thomas Barkin, Federal Reserve Bank of Richmond, president.

“I think the Fed has plenty of reason to worry, but not enough to act.” Bill Dudley, former president of the New York Federal Reserve, and Bloomberg Opinion columnist.

The Fed meeting attracted a little more interest than normal, if that is possible, given that it was the first meeting with Trump-onomics architect Stephen Miran. While only a temporary appointment (for now) Miran was vocal in arguing for a 50 bps cut. He also freely identified himself as the lone low dot for 2025 in the Board’s dotplot projection (see chart below).

Tariffs featured briefly in the news with an appeals court ruling that most of Trump’s tariffs were illegal (they can continue for now pending an appeal to the Supreme Court) and the announcement of a 100% tariff on imported pharmaceuticals. The market largely shrugged these off.

The market also largely shrugged off the not-infrequent Federal government shutdown. The democrats are trying to prevent cuts to healthcare, while the Republicans look set to cut embattled government agencies further.

However, Silicon Valley is not so happy with the new USD 100,000 fee for H-1B visas. Tech firms use the H-1B to recruit hot foreign talent. Foreign start-up founders also use it to live in the US. Looks like some short-term gain for a long-term brain drain.

China

At the end of September, the Chinese government stepped in with an extra USD 70 billion to speed up existing projects. This followed Chinese exports falling from 7.2% in July to 4.4% in August, the lowest level since Trump’s second-term tariffs (see chart below). Further, inflation fell into the deflation zone: -0.4% on a yearly basis. 

House prices continue to decline albeit at a slower pace (see chart below).

EU

Despite the turbulence in France (moving on to its fifth prime minister this term, a sell-down in its sovereign bonds, and a sovereign credit downgrade by Fitch), the EU was steady as she goes in September. Euro area inflation was flat at 2% in August and, as expected, the ECB kept interest rates unchanged.

June-quarter GDP showed a 0.1% increase for the quarter but a stronger-looking 1.5% increase on a yearly basis. Despite the hit from US tariffs since April, the euro area has maintained its good trade surplus (see chart below).

Japan

The BoJ kept interest rates on hold in September as inflation fell from 3.1% in July to 2.7% in August. June-quarter GDP was revised up from 0.3% to 0.5% on a quarterly basis. Exports decreased again, but at -0.1% was an improvement on the -2.6% in July.

Prime Minister Shigeru Ishiba stepped down early in the month after nearly a year in office. He could not stop the slide in the LDP’s popularity. He will be replaced with Abe-economics supporter Sanae Takaichi or the much younger and more socially liberal Shinjiro Koizumi.   

UK

Inflation remained flat at 3.8% in August, while the three-month average for production continued its recent precipitous decline in July (see chart below). Job vacancies are now below the level immediately before the COVID-19 pandemic.

The BoE left interest rates on hold at its September meeting. It is expecting inflation to come down after its “temporary” upward showing and remains concerned over the sluggish economy.

Source: ONS

New Zealand

June-quarter GDP decreased from 0.9% in the March quarter to -0.9% in the June quarter, on a quarterly basis. Manufacturing and construction were the biggest contributing industries to the decrease (see chart below).

What this means for Australian Private Debt

The Australian economy is continuing to prove resilient despite what is happening in the rest of the world even as its interest rates remain relatively high.